Best of the Week
Most Popular
1. Trumponomics Stock Market 2018 - The Manchurian President (1/2) - Nadeem_Walayat
2.Yield Curve Inversion a Remarkably Accurate Warning Indicator For Economic & Market Peril - Dan_Amerman
3.China is Now Officially at War With the US and Japan - Graham_Summers
4.Markets Pay Attention Moment - China’s Bubble Economy Ripe for Bursting - 16th Jul 18 - Plunger
5.Stock Market Longer-Term Charts Show Incredible Potential - Chris_Vermeulen
6.U.S. Stock Market Cycles Update - Jim_Curry
7.Another Stock Market Drop Next Week? - Brad_Gudgeon
8.The Death of the US Real Estate Dream - Harry_Dent
9.Gold Market Signal vs. Noise - Jordan_Roy_Byrne
10.The Fonzie–Ponzi Theory of Government Debt: An Update - F_F_Wiley
Last 7 days
Moving Averages Help You Define Market Trend – Here’s How - 14th Aug 18
It's Time for A New Economic Strategy in Turkey - 14th Aug 18
Gold Price to Plunge Below $1000 - Key Factors for Gold & Silver Investors - 14th Aug 18
Dow Stock Market Trend Forecast 2018 - Video - 13th Aug 18
Stock Market Downtrend to Continue? - 13th Aug 18
More Signs That the Stock Market Will Rally Until 2019 - 13th Aug 18
New Stock Market Correction Underway - 13th Aug 18
Talk Cold Turkey Economic Crisis - 13th Aug 18
Which UK Best Theme Park - Alton Towers vs Thorpe Park vs Lego Land vs Chessington World - 12th Aug 18
USD is Rising. What this Means for Currencies and Stocks - 12th Aug 18
Hardest US Housing Market Places to Live - Look Out Middle Class - 12th Aug 18
America’s Suburbs Are Making a Comeback - 12th Aug 18
Stock Market US Presidential Cycle, Seasonal Analysis and Economy - Video - 12th Aug 18
Yield Curve Inversion and the Stock Market - Video - 11th Aug 18
Land Rover Discovery Sport 1st Dealer Oil Change Service - What to Expect - 11th Aug 18
How to Setup Webinars and Use Them to Overcome the Barriers in E-Learning - 11th Aug 18
Big US Stocks’ Q2’18 Fundamentals - 11th Aug 18
Dow Stock Market Trend Forecast 2018 - 10th Aug 18
SPX Testing Its First Support Level - 10th Aug 18
Dreaming of a "Comfortable Retirement" on a Public Pension? - 10th Aug 18
The Forrest Gump of All Future Democrat Election Losses - 10th Aug 18
More Uncertainty as Stocks Got Closer to January Record High - 10th Aug 18
Gold and Silver Kill Zone - 9th Aug 18
Even More Cracks in the Gold Dam - 9th Aug 18
Ignore the Stock Market “midterm election year”, Which is “supposed” to be Weak - 9th Aug 18
Stock Market Trend and Volatility Analysis - Video - 9th Aug 18
Tips on Maximizing Small Serviced Offices Space - 9th Aug 18
VIX’s Collapse is Bullish for VIX and the Stock Market - 9th Aug 18
Vestles Platform Offers Several Key Trading Tools - 8th Aug 18
US Stock Markets Higher Until November 2018 - Part 2 - 8th Aug 18
US Stock Markets Higher Until November 2018 - Part 1 - 8th Aug 18
Stock Market US Presidential Cycle and Seasonal Analysis - 8th Aug 18
Is the Stock Market Correction Over? - 7th Aug 18
Yield Curve Inversion and the Stock Market - 7th Aug 18
Stock Market Elliott Wave Analysis and Forecast - Video - 7th Aug 18
Trade War! Win the Economic Hostilities Against the Chinese - 7th Aug 18
Technical Analyst Sees Silver as 'Oversold' - 7th Aug 18
Alex Jones Banned! Will Unapproved Opinions Be Censored Off the Internet? - 7th Aug 18
Gold and Silver Stocks On the Verge of the Next Major Decline - 7th Aug 18
First Time Buyers Need to ‘boost the affordability’ of Their Move Alone  - 7th Aug 18
Long Term Care Homes as an Investment are Heating Up! - 7th Aug 18
The Exponential Inflationary Stocks Bull Market - Video - 6th Aug 18
Land Rover Discovery Sport Oil Change Service Dash Warning Message - 6th Aug 18
Restructuring of Western Economic Power - 6th Aug 18
Stock Market Trend and Volatility Analysis - 6th Aug 18
Stock Market and Economy False Narratives That are Just Wrong - 6th Aug 18
VPN – Is It Worth It? - 6th Aug 18
All You Need to Know About Umbrella Companies - 6th Aug 18
Why China Lost the Trade War Before it Even Began - SSEC Stocks Index - Video - 5th Aug 18
Dow Stock Market Elliott Wave Analysis - 5th Aug 18
Iran's Rial Currency Is In A Death Spiral, Again - 5th Aug 18
IMF Produces Another Bogus Venezuela Inflation Forecast - 5th Aug 18
Gold & Silver Precious Metals Monthly Charts - 5th Aug 18
Time to Position for a Decade-Long Bull Market in Natural Resources - 5th Aug 18

Market Oracle FREE Newsletter

Trading Any Market

The Long-Term Fundamental Case for Gold

Commodities / Gold and Silver 2012 Feb 22, 2012 - 03:23 AM GMT

By: Chris_Vermeulen

Commodities

Best Financial Markets Analysis Article“No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.”

~ United States Constitution, Excerpt from Article 1, Section 10 ~


A quick glance at most of the headlines over the weekend and the primary focus seemed to be either calling a near term top in domestic equity indices or a focus on the Greek debt situation. Why is anyone even paying attention to what is going on over there? Until the ISDA declares a default where the underlying Credit Default Swaps (CDS) are triggered, it is all just noise.

The ECB has broken the rule of law by placing itself as the senior creditor ahead of private creditors, the Greek government is trying to pass retroactive legislation to trap private sector creditors holding out of the PSI, and the leader of Greece was not even elected by the people of Greece – how much more manipulation and insanity do we need to monitor?

Similar to the price action since 2008, central banks around the world control everything from financial markets to the ascent of political leaders. These same political leaders help central bankers and planners control policy and decision making at the highest government levels in Europe and around the world. It would seem that the United States should change the motto from “We the People” to “We the Bankers.”

However, there is one particular asset class that even the central bankers have a hard time controlling. While they can impact short term price action through direct currency manipulation initiatives, in the longer-term gold is likely to move in only one direction – higher.

The price action on Tuesday reminded market participants that actions such as the Greek bailout come at a cost. Quantitative easing and/or printing money (depending on what one wishes to call the practice of producing fiat currency out of thin air) has a direct impact on the price of gold.

Many financial pundits argue that gold has no utility, but what they fail to recognize is that gold is the senior currency to all other fiat currencies. Silver is also a form of currency and is senior to all other fiat currencies as well. While one can draw the utility of gold into question, the idea that gold is the senior most currency to all other fiat currencies is not new.

The Constitution of the United States of America, which is over 200 years old, refers to gold and silver as forms of payment.  Looking back thousands of years the Romans used gold coins as a form of currency. The idea that gold and silver are currencies is certainly not a grandiose thought or a stretch of historical concept. Trying to depict gold as a worthless asset depends on your view and consideration of fiat currency.

There are those that would argue that the Federal Reserve of the United States is not actively manipulating economic conditions domestically or abroad. For those that view gold as a poor investment or hedge against currency devaluation need to consider the charts illustrated below. The chart below was produced by Thomas Gresham of Gresham’s Law.

Total Asset Growth of the Federal Reserve System – 1915 – 2012

It is rather obvious by looking at this chart that the Federal Reserve has actively sought to enter domestic and foreign financial markets. The surge in balance sheet assets serves to prove how far the Federal Reserve Bank is willing to go to maintain markets which seemingly are only allowed to move higher over time.

This chart is bearish for nearly any form of paper backed assets. The above referenced chart is long-term bearish for the Dollar and Treasuries and long-term bullish for physical gold and silver. As the Federal Reserve continues to debase the U.S. Dollar in concert with other central banks’ monetary easing programs, gold and silver prices over time are destined to move higher in virtually every form of fiat currency.

During the same time frame that the Federal Reserve has seen its balance sheet grow exponentially, the rapid rise of M2 money supply is staggering. The long term chart of M2 is compared to gold futures in the charts presented below.

M2 Money Stock

Gold Futures Monthly Chart

It is rather obvious what has happened to the price of gold as the M2 money supply has grown. The idea that the Federal Reserve has not already destroyed a significant amount of the purchasing power of the Dollar can easily be refuted by the two charts shown above.

In the short-term, gold and silver could suffer from a pullback, but in the intermediate to longer term it is unlikely that we have seen the highs of this bull market for either metal. As long as central banks around the world continue to print money and expand their balance sheets gold and silver will remain in a long-term bull market. The daily chart of gold futures is presented below.

Gold Futures Daily Chart

As can be seen above, it is not out of the question that we could see gold pullback to test one of the key moving averages in coming days/weeks. However, I expect the key support area to hold in the event of a sharp selloff. Ultimately, I expect to see a breakout over the resistance zone in the days/weeks ahead. However, I would not be surprised to see gold consolidate or work marginally lower from current prices before breaking out to the upside. Right now the primary threat in this fledgling gold rally is a short-term spike higher in the U.S. Dollar. The primary catalyst which could drive a flight to the Dollar involves the sovereign debt situation in Greece and the Eurozone as a whole.

While the short-term price action may be bearish, the intermediate to longer term time frames are quite bullish for metals as central banks will continue to race to debase their currencies. Quantitative easing in the U.S. and around the world will become pervasive and gold prices could potentially soar in value. The data from the Federal Reserve Bank itself suggests that they are indeed increasing the money supply. As time has passed, the money supply and gold have seemingly grown in lockstep with one another. Surely inquiring minds do not consider this mutual relationship between gold and the money supply to be purely coincidental.

As further evidence that the Federal Reserve continues to use quantitative easing to manipulate asset prices through direct entry into financial markets, a chart of the velocity of M2 clearly depicts that the velocity of money is declining. I am not an expert regarding macroeconomic data, but if the velocity of money is declining to 1960’s levels would it be a stretch to say that we may be going through a period of stagflation? The chart below illustrates the Velocity of M2 Money Stock courtesy of the St. Louis Federal Reserve Bank.

Velocity of M2 Money Stock

For those unfamiliar with the term velocity of money, it is simply the rate of turnover in the overall money supply. The velocity of M2 is expressed as the number of times that a Dollar is used to purchase final goods or services which are included in the total gross domestic product.

Conclusion

The short term technical picture in gold is a bit suspect due to overhead resistance and recent U.S. Dollar strength. However, the longer term macro factors that impact the value of the U.S. Dollar and precious metals are all telling us the same thing.

As time wears on and central banks do even more to prop up the broader economy and failing financial institutions, it is without question in my mind that gold and silver will both benefit handsomely from these decisions being made by central bankers from around the world.

Ultimately, I am very bullish of gold and silver in the intermediate to longer-term, but in the immediate short-term frame gold could consolidate or pullback before breaking out to the upside.

Get My FREE Weekly Newsletter Here: http://www.GoldAndOilGuy.com/

By Chris Vermeulen
Chris@TheGoldAndOilGuy.com

Please visit my website for more information. http://www.TheGoldAndOilGuy.com

Chris Vermeulen is Founder of the popular trading site TheGoldAndOilGuy.com.  There he shares his highly successful, low-risk trading method.  For 6 years Chris has been a leader in teaching others to skillfully trade in gold, oil, and silver in both bull and bear markets.  Subscribers to his service depend on Chris' uniquely consistent investment opportunities that carry exceptionally low risk and high return.

This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.  

Chris Vermeulen Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules